Herbalife Auditor Resigns After Firing Partner Over Insider-Trading Allegations

Apr 9 2013 | 1:28pm ET

Already facing accusations by a hedge fund manager that it is a pyramid scheme, nutritional supplements company Herbalife has lost its auditor in the wake of an insider-trading scandal.

KPMG has resigned as Los Angeles-based Herbalife's auditor after it fired a partner for allegedly passing confidential tips about two clients to someone who then traded on the tips. One of the two companies in question is Herbalife, according to published reports.

Trading in Herbalife shares was suspended this morning pending the announcement. Herbalife fell when trading finally began later in the morning.

There is no indication of wrongdoing on Herbalife's part in the matter. KPMG said that unidentified partner, the head of its audit practice in Los Angeles, had "violated the firm's rigorous policies and protections, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for KPMG's long-standing culture of professionalism and integrity." And while it withdrew its certification of Herbalife's and the other company's financial statements, KPMG made clear it had no reason to believe those statements contained errors, and Herbalife said it had confidence in its last three years' statements.

Federal prosecutors are investigating the former partner. KPMG said he is cooperating with the investigation, according to the second company involved, Skechers.

Herbalife has been under siege since December, when Pershing Square Capital Management's William Ackman accused it of being a pyramid scheme. In February, he warned, "if I were KPMG, I'd take a very, very careful look at that financial statement before I slap my brand on it."

Despite the latest setback, one hedge fund manager isn't giving up on Herbalife. Chapman Capital's Robert Chapman told The Wall Street Journal that he remains "very long and will double my position today if it falls materially, as even KPMG has stated there is no reason to believe any accounting/auditing work is improper."

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